I just read this article.
I found this statement by Tan Huey Min, general manager of Credit Counselling Singapore a little misleading:
Over the long run, if you pay off the loan in eight years, the amount you have paid is much more than if you had paid the loan off in five years.
First off, back when 100% 10-year loans were allowed, the interest rate was 1.88-2.8%. EIR 3-4%.
Now that MAS capped loans to 50% 5-year, banks raised interest rates to 3.25%, or EIR 6-7%.
Given an arbitrary amount of $100,000. This is how it works out:
10 years, 100% loan @ 1.88% = $18,800 in interests
5 years, 50% loan @ 3.25% = $8,125 in interests
Sure, the interests would have reduced by over $10k+ but these have not taken into account the time value of money, i.e. inflation.
Singapore’s inflation rate averaged around 4% over the last 5 years. Given that the old EIR was 3-4%, it was actually cheaper to take the loan.
Note also when you stretch a car loan, the real EIR decreases.
Here’s what $50K (the down payment amount) if hedged against inflation would work out over 5 years at 4%:
$50,000 (P) x 4% compounded (r) x 5 years (Y)
Future value = P(1 + r)^Y = 50000 x (1.04)^5 = $60,832.65
Amused? No. It is exactly that. The interest rates have risen taken into account the reduction in banks profits.
So to the cash-rich savvy investor, down paying 50% may not make sense with the revised interest rates then.
However, if one does not invest wisely, sure… avoiding the debt would be good.
Now with this blog post I did not say to go right now and take a full loan on a car while you still can. Taking on loan with leverage need to be weighed against risks. The most important risk to manage is the ability to bail out at any time.